If you know that you want to move away from of your current property, you have a few options. You might automatically think about putting your home up for sale. However, you can also lease your home out to tenants and create a stream of passive income. Which strategy is right for you?
Let’s take a look at some of the pros and cons of selling and leasing your home.
Housing Indicators To Pay Attention To
Your local housing market can influence your decision to rent or sell your home. Let’s take a look at a few housing indicators to consider when you make your choice.
Home sales indicators tell you how much competition there is for each home on the market. If home sales are high, it means that more buyers are moving to the area. This means that there are more buyers competing for each home. If you sell your home when home sales are high, you’re more likely to get a higher final selling price.
If home sales are lower, it means that sales might be on the decline. Fewer buyers may move into the area, which means each individual buyer has a choice of which house they buy. If home sales are lower, you may want to consider renting out your property and selling when sales increase.
Home price indexes tell you about the average selling price of a home. High home sales prices can be good for both leasing and selling your home. If you sell your home when home sale prices are higher, you’ll often be able to secure a higher final selling price for your property.
You may also be able to charge more in rent if home prices are on the rise. If home prices are going up, it means that more people are moving to your area and fewer homes will be available for purchase. This improves the market value of homes to rent as well.
Housing supply indexes track the number of vacant homes for sale in your area. Housing supply rates are strongly correlated with price. If the housing supply in your area goes down, it means that there’s more competition for each home. This drives up the price of each property. If you live in an area with a low housing supply, you may want to consider putting your home on the market for a faster sale.
If housing supply is high, it means that there are fewer homeowners looking to buy in your area. This means that you’re less likely to secure a high selling price for your home. You may want to consider leasing your home until your local home supply falls to maximize the profit on your sale.
Rental affordability indexes track the percentage of the average family’s income that goes toward rent. If rental affordability is low, you’re likely to attract more tenant applicants if you decide to lease your home. However, this means that you’re limited in what you can charge in rent for your home. If you’re looking for cash to fund your next home purchase, it’s often more advantageous to sell your home when rental affordability is high.
If rental affordability is low, it means that rents in your area are more expensive. This can be a double-edged sword for landlords. If you rent out your home, you can get more money in rent each month. However, you may have trouble finding a tenant who can afford your space.
Becoming A Landlord
If you decide to rent out your home, you can choose to manage the property yourself or hire a property management company. Both options come with advantages and disadvantages.
Managing The Property Yourself
If you decide to manage your property yourself, there are a number of things you’ll need to take into account.
- Additional Insurance. Most homeowners insurance policies don’t provide full protection for your home if you decide to rent it out. You’ll need to purchase a special landlord insurance policy for your home, which is more expensive than a standard homeowners insurance policy.
- Maintenance And Upkeep. Being a landlord doesn’t mean collecting free money at the beginning of every month. You must make repairs and perform maintenance to keep your space livable. You must make repairs in a timely manner. In some states, tenants may withhold a portion of their rent if you fail to make repairs. Be sure you have time to manage properties when you’re a landlord.
- Tenant Selection. There are many housing laws that control rental properties. One law that you need to be aware of is the Fair Housing Act, which prohibits landlords from discriminating against certain tenants. Under the Fair Housing Act, you cannot refuse to rent to a tenant based on race, gender, familial status, disability and other protected classes.
This doesn’t mean that you should rent to the first person who applies for your space. Screen your tenants using legal methods to find people you trust. Running credit checks, requesting references and asking for proof of employment are all legal methods of ruling out tenants.
- Tenants’ Rights. As soon as you rent out your home, you forfeit a number of rights to your home – regardless of the fact that you own the property. Each state has its own set of laws that protect tenants’ rights to enjoy the space they rent out. For example, most states have right to privacy laws that prevent landlords from entering their rented space without giving tenants at least 24 hours’ notice. These laws can vary by state. If you’re thinking about becoming a landlord, consider taking a tenants’ rights class at your local community college to learn more about your states’ laws.
- Legal Eviction Processes. If you need to evict a tenant, you must follow your state’s legal eviction process. You may never use force or a self-help eviction (for example, turning the tenant’s utilities off or changing the locks) to remove a tenant. This is true even if the tenant hasn’t paid rent or has destroyed your space. In most states, an eviction can take over a month, and you must hire an attorney to handle the paperwork. Performing an illegal eviction can earn you everything from a fine to a jail sentence, depending on where you live. It’s incredibly important to choose your tenants carefully.
Hiring A Property Manager
You can also hire a property management company to take care of your rental unit. Property management companies understand the rental unit laws in your state. They can help take some of the burden of managing your space off your plate while also respecting local laws. Some services that property managers may offer include:
- Rent Collection. Many property management companies collect rent on your behalf and pay it out to you.
- Tenant Screening. Many management companies offer tenant screening and advertising services. They can help you select the tenants who are most likely to respect your space.
- Maintenance Management. Your property manager can handle management requests on your behalf.
- Emergency Maintenance. Property management companies have 24/7 on-call managers to handle emergency repair needs.
- Many property management companies offer scheduled inspections to ensure that your tenants aren’t breaking their lease.
Most property management companies charge you a percentage of the total rent you charge for the space they’re managing. If you have more than one rental unit, your management company may charge more. Hiring a property management company brings an additional fee but can make being a landlord significantly easier for you.
Selling Your Property
There are pros and cons of selling your home instead of renting.
Benefits Of Selling
- One-Time Lump Sum Payment. When you sell your home, you receive a one-time lump sum of money. You can use this money for a down payment toward a new home.
- Less Risk. When you sell your home, you’re guaranteed a set sum of money. You won’t need to worry about tenants destroying your home or refusing to pay their rent.
- Less Work. Being a landlord can quickly turn into a full-time job. When you sell your home, all you’ll need to worry about is showing it to potential buyers and negotiating a selling price.
Downsides Of Selling
- No Longer Own The Property. Once you sell your property, you can’t take advantage of any rises in property values. If you sell at a time when prices are low, you might end up losing money on your investment.
- Forfeit A Passive Income Stream. When you sell your home, you receive a one-time lump sum of cash. However, if you manage your rental property effectively, you may be able to create a stream of passive income for years to come.
If you don’t want to live in your home anymore, you can sell it or lease it. Housing market indicators (like average home prices and housing availability) can help inform your decision. If you decide to lease your home, you can manage it yourself or hire a property management company. Managing your own rental unit saves you money, while hiring a property management company saves you time.
You’ll receive a one-time lump sum of cash if you decide to sell your home. If you want to buy a new home, you can put this money toward your new property. You also don’t need to worry about tenants missing rent or harming your space. However, once you sell your home, you forfeit the potential to create a passive stream of income and any further property value increases.
In This Article
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